Is the digital economy actually an economy (yet)?

Some years ago, I wrote a post that took Chris Anderson’s “freemium” model to task. In it I argued that once you had provided services and information freely, the conversion to payment was going to be a lot tougher. Free, I suggested, would become an implicit entitlement.

Last week, in a withering attack in the New York Times, Ross Douthat lashed out at what he called “The Facebook Illusion”. Comparing Web 2.0 to the home ownership bubble, he took particular aim at the world’s biggest social networking site. The relative disappointment of its IPO should be read, he maintains, not as an indication that Facebook doesn’t make money, but rather that “it doesn’t make that much money, and doesn’t have an obvious way to make that much more of it, because … it hasn’t figured out how to effectively monetize its million upon millions of users … This “huge reach, limited profitability” problem is characteristic of the digital economy as a whole.”

It’s probably a little early to call Facebook. Whether the IPO misfired or was misfired seems to depend a lot on who you listen to.

As for the revenue generation part, I wonder whether the digital economy hasn’t worked out how to make money or whether people have continued to apply the expectations of an analogue model to digital developments. The bell curve model I alluded to last week re. brand likeability has strong economic implications. Specifically, with that model, companies become more profitable as products become more likeable and more popular. This makes complete sense when the transaction is physical. Money changes hands for goods. Volume raises the number of transactions.

But that assumption doesn’t transfer to the digital economy because anyone can “like” and indeed engage with anything or anyone for free. And that doesn’t change no matter how many people participate. The argument I constantly see is that with enough awareness and engagement on the part of brands consumers will “tip” past free interaction and they will buy. Therefore all those millions and millions of people who are currently ‘awaring’ and engaging are a relationship, sales and income pipeline. If you evaluate that audience through a traditional likeability model, that’s an enormously valuable resource.

But what if that’s not true? What if the majority of those people are quite happy to just keeping looking and engaging without going any further? What if no amount of volume will change that – in fact, given the dynamics of popularity on technology, what if being served more and more actually causes entitlement to become more and more implicit? Then that would suggest that the more popular Facebook becomes, the more difficult it is going to be to generate proportional money because the more embedded the expectations of not paying will become.

If this is true then the future profitability of Facebook and indeed the digital economy may depend on changing a habit it helped foster. Social media gave us the world for nothing. That, as Douthat points out, was nothing short of a cultural revolution. But, he says, “The “new economy,” in this sense, isn’t always even a commercial economy at all. Instead, as Slate’s Matthew Yglesias has suggested, it’s a kind of hobbyist’s paradise, one that’s subsidized by surpluses from the old economy it was supposed to gradually replace.”

The old economy model, it seemed to me, stressed some metrics that have made their way across the digital divide, but, if Douthat is right, changed meaning in the process. Market presence for example, and top of mind are easier and cheaper to acquire digitally but they are also easier to lose (distractions) and harder to convert.

The key takeout from General Motors’ advertising exodus from Facebook is not that they don’t see Facebook as valuable – they absolutely do – they just don’t see advertising on the site as worth paying for when they can pursue their content strategy for free on Facebook Pages.

That makes digital an excellent information channel but not an economy.

In my post on the changing shape of brand likeability, I said that the evolution from a bell curve to an ellipse “suggests that the role of marketing is to feed the centrifuge by intensifying the motivation for people to feel like, and buy like, part of a community.” And therein lies the challenge. Not just feel like a community but buy like one too.

Right now I think that’s a potential disconnect for Facebook and others – one that could seriously impair its ability to spin profits at the speed that Wall Street will expect. Millions of people talking is not the same as millions of people buying. And if millions of people will talk anyway without being advertised to, and they don’t act on the advertising they do see, what is the value of the advertising and how can it justify the leverage levels of the IPO?

The biggest challenge going forward for those for a “weightless” or digital economy will be to herd those hundreds of millions of digital natives into economically active and measurable tribes.